China Plans Tax Cut for Low Earners
By AARON BACK
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| A Beijing worker washes a window |
Proposed revisions to the tax code reviewed by the legislature on Wednesday would raise the lowest level of monthly income subject to taxation to 3,000 yuan ($460) from the current 2,000 yuan ($305). The minimum wage of a Chinese worker in Beijing is 1,160 yuan ($178) a month.
The new tax law would reduce the number of marginal tax brackets to seven from nine, the Ministry of Finance and the State Administration of Taxation said in a joint statement on their websites.
The maximum threshold for the bottom two brackets would be raised, so that workers earning up to 4,500 yuan ($690) a month would pay a marginal tax rate of 10%. According to the statement, 94% of Chinese taxpayers fall within that threshold.
Two brackets, with rates of 15% and 40%, would be eliminated, meaning that more taxpayers would qualify for the top marginal rate, which will remain at 45%.
Growing income inequalities undermine the Chinese Communist Party's overriding goal of political stability. That fear underpins calls for a "harmonious society" that have defined the leadership philosophy of Chinese President Hu Jintao and Premier Wen Jiabao.
Resentment at paying taxes is also rising among many Chinese, with some activists in recent years demanding more transparency on how their tax dollars are spent.
Unlike in major Western economies, individual income taxes make up only a small portion of government revenue in China, partly by design and partly due to widespread tax evasion. For that reason, analysts say, the effect of the proposed changes on government finances and the overall economy would be small.
"We do not expect the reform to reduce tax revenue significantly," said Citigroup economists Minggao Shen and Ken Peng in a note. "A modest boost to domestic consumption is likely given the high consumption propensity of low-income households."
Last year, income taxes made up only 6.8% of the central government's revenue, according to the Ministry of Finance. The largest sources were sales taxes and value-added taxes levied on foreign imports, at 25% of revenue, followed by value-added taxes on domestic goods at 20%.
Tax changes have been widely anticipated since last month, although the details were not revealed until Wednesday. The law is being reviewed by the Standing Committee of the National People's Congress, the official Xinhua News Agency reported Wednesday, indicating that the changes may be finalized and become law imminently.
—Eliot Gao contributed to this article.
Write to Aaron Back at aaron.back@dowjones.com
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